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Valuation gap between IndiGo, SpiceJet likely to get narrow

ET Intelligence Group: In an industry where the fall of one player brings handsome gains to the rivals, the attention that SpiceJet is getting from investors looks normal. But what may not be so obvious is the steeper gain that the stock has seen in the past two weeks since the troubles of rival Jet Airways worsened, compared with that of Inter-Globe Aviation that operates Indi-Go, the nation’s largest airline.

SpiceJet’s stock has gained 36 per cent in two weeks through Tuesday to Rs 132, against an 11.8 per cent increase for Inter-Globe, which closed at Rs 1,583.

Despite this recent high interest in both SpiceJet and InterGlobe, there is a marked shift in the way the Street is assessing the stocks. A key question gaining credence post the operational crisis of Jet Airways is the valuation premium that Inter-Globe enjoys over SpiceJet. The market expects this gap to reduce, and that explains the steeper gains in the stock price of the smaller airline.


There are a few reasons for the valuation gap to narrow. One, SpiceJet has grabbed a large number of slots held by Jet Airways. These slots should serve well for the airline which has a market share of 13.5 per cent at the end of February. In the coming months, it is expected to gain incremental market share as Jet’s operations have dwindled (it is operating just five aircraft, compared with as many as 120 a few months ago).

Another factor is that SpiceJet has demonstrated better pricing power in comparison with its peers. The difference in pricing power of SpiceJet and Indigo is more prominent in routes beyond metros — it is estimated to be 10-15 per cent. Also, as SpiceJet flies more routes under the government’s regional connectivity scheme, it has a higher potential to gain further market share and may improve its yields meaningfully. Analysts expect it to gain incremental market share of at least 2 per cent in the coming months.

At present, Indigo has a market share of 43 per cent, which is more than three times that of SpiceJet. Inter-Globe’s market capitalisation is close to eight times that of the smaller rival.

On the valuation front, considering the estimated earnings for fiscal 2021, SpiceJet is trading at an EV/EBIDTA of 6.5, against Inter-Globe’s 8.5. That is a discount of 24 per cent for SpiceJet.

InterGlobe is expected to continue trading at a premium given its huge capacity and dominant market share, but the Street believes the 24 per cent gap to be too steep. It may come down in the coming months, as SpiceJet’s revenue is expected to grow faster.

Source: Economic Times